FTSE 350 pension liabilities fall back as year-end approaches

The FINANCIAL -- Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies fell from £149bn at the end of October to £127bn on 30 November 2016.

At 30 November 2016, asset values were £701bn (representing a fall of £10bn compared to the corresponding figure of £711bn at 31 October 2016), and liability values were £828bn, representing a fall of £32bn compared to the corresponding figure of £860bn at the end of October. Although both liabilities and deficits have fallen from the highs seen over the last three month ends they are still significantly above pre-Referendum levels.

“The increase in corporate bond yields over the month has resulted in the largest monthly fall in liability values since June 2015. The resulting reduction in deficits will be positive news as we near the reporting year end for many companies, albeit the reduction is from some of the all–time highs seen in recent months and still leaves us well behind the start of the year.” said Ali Tayyebi, Senior Partner in Mercer’s Retirement business. “The challenge for many corporate sponsors and Trustees may surely be the question of when would be right time to lock in some of this good news,” he added.

Le Roy van Zyl, a Mercer Senior Consultant said, “Markets have been very volatile in the wake of the surprise election of Donald Trump, with the aggregate impact being favourable for pension schemes’ funding position. Without wishing to put a dampener on this improved position though, there is still very little clarity on how the economic and financial conditions will develop from here on out as a result of his election. This needs to be combined of course with ongoing uncertainty in Europe and Brexit. Questions trustees and sponsors should be asking themselves are whether this is the time to take off some of the risk which has recently been rewarded, and whether they are comfortable that they can deal with the range of scenarios that can emerge in the months and years to come.”

Mr van Zyl continued “One important way in which we are seeing clients deal with the volatile situation is to reduce the focus on a 'snapshot' of their financial position once every three years, and rather move to a much more regular review of their position, taking account of emerging conditions, opportunities and risks.”

Mercer’s data relates to about 50% of all UK pension scheme liabilities and analyses pension deficits calculated using the approach companies have to adopt for their corporate accounts. The data underlying the survey is refreshed as companies report their year-end accounts. Other measures are also relevant for trustees and employers considering their risk exposure. But data published by the Pensions Regulator and elsewhere tells a similar story.